UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended June 29, 2002

Commission File Number:  000-19406

Zebra Technologies Corporation

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and has been subject to such filing requirements for the past 90 days.

ý  Yes   o  No

As of August 7, 2002, there were the following shares outstanding:

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

QUARTER ENDED JUNE 29, 2002

INDEX

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PART I - FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements

ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in thousands, except per share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

Zebra Technologies Corporation and subsidiaries (the Company) prepared, without audit, the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated balance sheet as of December 31, 2001, presented herein, has been derived from the audited consolidated balance sheet contained in the Annual Report on Form 10-K. In the opinion of the Company, the interim consolidated financial statements reflect all adjustments necessary to present fairly the consolidated financial position of the Company as of June 29, 2002, and the consolidated results of operations for the three and six months ended June 29, 2002, and June 30, 2001, and the consolidated statements of cash flows for the six months ended June 29, 2002, and June 30, 2001. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note 2 – Inventories

The components of inventories are as follows (in thousands):

Note 3 Earnings Per Share

Earnings per share were computed as follows (in thousands, except per-share amounts):

The potentially dilutive securities, that were excluded from the earnings per share calculation, consisted of stock options for which the exercise price was greater than the average market price of the Class A Common Stock. The shares amounted to 223,000 and 233,000 for the three and six months ended June 29, 2002, respectively, and 437,000 and 429,000 for the three and six months ended June 30, 2001, respectively.

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Note 4 – New Accounting Pronouncements Including Intangible Asset Data

During the first quarter of 2002, Zebra implemented SFAS No. 142, Goodwill and Other Intangible Assets, which replaces the requirements to amortize intangible assets with indefinite lives and goodwill with a requirement for an annual impairment test. SFAS No. 142 also establishes requirements for identifiable intangible assets. As a result, during the first quarter Zebra reclassified $21,720,000 of intangible assets into goodwill. Operating income for the first six months of 2001 includes $1,845,000 of amortization of goodwill and other intangible assets that are not included in 2002 results, because of the implementation of SFAS No. 142.

Intangible asset data are as follows (in thousands):

Net income, basic earnings per share, and diluted earnings per share would have been $32,582,000, $1.07, and $1.06, respectively, for the six months ended June 30, 2001, if adjusted for the impact of the implementation of SFAS No. 142 (i.e., if goodwill had not been amortized).

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS 143 must be applied starting with fiscal years beginning after June 15, 2002. Management is currently evaluating the impact that the adoption of SFAS 143 will have on the consolidated financial statements.

Note 5 – Derivative Instruments

In the normal course of business, portions of the Company’s operations are subject to fluctuations in currency values. The Company addresses these risks through a controlled program of risk management that includes the use of derivative financial instruments.

The Company enters into foreign exchange forward contracts to manage exposure to fluctuations in foreign exchange rates related to the funding of its United Kingdom operations. The Company accounts for such contracts by recording any unrealized gains or losses in income each reporting period. The notional principal amounts of outstanding forward contracts were €22,000,000 and 8,769,000 at June 29, 2002, and  €15,000,000 and 136,000 at June 30, 2001. The realized gain/(loss) related to these forward contracts was ($383,000) and ($234,000) for the three and six months ended June 29, 2002, respectively, and $408,000 and ($420,000) for the three and six months ended June 30, 2001, respectively.

Note 6 – Acquisition Termination Costs and Sale of Investment

In the first quarter of 2002, the Company terminated the acquisition agreement and tender offer in which the Company would acquire all outstanding shares of common stock (including associated rights to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In connection with the termination, the Company recorded $3,300,000 in expenses for capitalized acquisition costs and other acquisition costs that would otherwise have been capitalized. There was no such expense in the first quarter of 2001. Also during the quarter ended March 30, 2002, the Company sold its investment in common stock of Fargo and realized a pre-tax gain of $1,953,000, which was included in investment income.

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Item 2.                           Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations: Second Quarter of 2002 versus Second Quarter of 2001, Year-to-date 2002 versus Year-to-date 2001

Net sales for the second quarter of 2002 were $115,951,000, up 2.7% from $112,935,000 for the second quarter of 2001. Hardware sales (printers and replacement parts) increased 0.5% and accounted for 75.0% of 2002 second quarter net sales, compared with 76.6% of net sales for the second quarter of 2001. Supplies sales were up 6.8% from the second quarter of 2001 and comprised 18.7% of net sales versus 18.0% of net sales for the second quarter of 2001. Service and software revenue accounted for 5.5% of second quarter sales, increasing 31.6% from the second quarter of 2001, in which service and software revenue accounted for 4.3% of net sales. The remaining 0.8% of net sales consisted of freight revenue. For the year to-date, net sales decreased 0.9% to $226,136,000 from $228,079,000.

International sales for the second quarter of 2002 increased 13.8% to $51,127,000 from $44,941,000 and accounted for 44.1% of 2002 second quarter sales, compared with 39.8% of net sales for the second quarter of 2001. All of the Company’s geographic regions outside North America contributed to this growth. The strength of the British pound versus the U. S. dollar increased sales for the Company’s European region by approximately $1,203,000, compared with exchange rates that prevailed during the second quarter of 2001. For the first six months of 2002, international sales increased 8.6% to $96,767,000, or 42.8% of net sales, from $89,100,000, or 39.1% of net sales.

During the quarter, sales to North American customers, which continue to be affected by economic conditions in the United States, decreased 4.7% to $64,824,000 from $67,994,000 in 2001. The decline in sales to North American customers was concentrated in sales of bar code label printers. For the first six months of 2002, North American sales were $129,369,000, compared with $138,979,000 in 2001 for a decline of 6.9%.

Gross profit for the second quarter of 2002 was $55,749,000, up 6.5% from $52,334,000 for the second quarter of 2001. As a percentage of net sales, gross profit increased to 48.1% from 46.3%. The increase in gross profit margin was principally due to reduced capacity variances and the effect of lower component costs, offset by an unfavorable product mix. The unfavorable product mix was offset by the effect of foreign exchange on sales to European customers, which increased gross profit by $1,425,000, compared with exchange rates that prevailed during the second quarter of 2001. For the year to-date, gross profit for 2002 increased 1.3% to $107,760,000, or 47.7% of net sales, compared with $106,357,000, or 46.6% of net sales, for 2001.

Selling and marketing expenses increased 2.9% to $13,531,000 from $13,146,000. As a percentage of net sales, second quarter selling and marketing expenses increased to 11.7% from 11.6%. Sources of increased spending were from advertising and trade shows, cooperative advertising programs with reseller partners, consulting services, payroll, and bonus payments. Management will continue to invest in market development and sales promotion activities to improve the Company’s competitive position. The success of these programs cannot be determined at this point. For the first six months of 2002, selling and marketing expenses increased 1.0% to $25,479,000 from $25,220,000 for the corresponding period in 2001.  As a percentage of net sales for the year to-date, selling and marketing expenses were 11.3% in 2002 and 11.1% in 2001.

Research and development expenses for the second quarter of 2002 were $7,472,000, down 1.9% from $7,615,000 for the second quarter of 2001, resulting from reduced personnel costs and project expenses. As a percentage of net sales, quarterly research and development expenses decreased to 6.4% from 6.7%. For the first six months of 2002, research and development expenses increased 5.0% to $14,927,000 from $14,211,000 in 2001. For the year to-date, research and development expenses represented 6.6% of net sales in 2002 and 6.2% in 2001.

General and administrative expenses increased by 11.0% to $9,413,000 from $8,479,000. Higher personnel costs and consulting costs were the primary causes of the increase. As a percentage of net sales, quarterly general and administrative expenses increased to 8.1% from 7.5%. For the first six months of 2002, general and administrative expenses increased 10.0% to $18,742,000, or 8.3% of net sales, from $17,033,000, or 7.5% of net sales in 2001.

During the first three and six months of 2002, Zebra recorded $367,000, and $735,000 in amortization of intangible assets, compared with $1,297,000 and $2,580,000 for the comparable periods of 2001. During the first quarter of 2002, Zebra implemented SFAS No. 142, Goodwill and Other Intangible Assets, which replaces the requirements to amortize intangible assets with indefinite lives and goodwill with a requirement for an annual impairment test. SFAS No. 142 also

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establishes requirements for identifiable intangible assets. As a result, during the first quarter Zebra reclassified $21,720,000 of intangible assets into goodwill, as such assets did not meet the criteria for recognition as an asset apart from goodwill under SFAS No. 142. Operating income for the second quarter of 2001 includes $930,000 of amortization of goodwill and other intangible assets that are not included in 2002 results, because of the implementation of SFAS No. 142. Operating income for the first six month of 2001 includes $1,846,000 of amortization of goodwill and other intangible assets that are not included in the 2002 results in conjunction with the implementation of SFAS No. 142.

Also in the first quarter of 2002, the Company terminated the acquisition agreement and tender offer in which the Company would acquire all outstanding shares of common stock (including associated rights to purchase preferred stock) of Fargo Electronics, Inc. for $7.25 per share in cash. In connection with the termination, the Company recorded $3,300,000 in expenses for acquisition costs that would otherwise have been capitalized. There was no such expense in 2001.

For the second quarter of 2002, there were no merger costs, compared with $532,000 for the second quarter of 2001. These costs were related to the acquisition of Comtec Information Systems in April 2000. For the year to-date in 2002, merger costs totaled $73,000, compared with $1,364,000 for the first six months of 2001.

Second quarter operating income increased 17.4% to $24,966,000 from $21,265,000. As a percentage of net sales, operating income was 21.5% for the second quarter of 2002, compared with 18.8% of net sales for the second quarter of 2001. Excluding merger costs related to the Comtec acquisition, operating income increased 14.5% from $21,797,000, or 19.3% of net sales, for the second quarter of 2001. For the first six months of 2002, operating income was $44,504,000, or 19.7% of net sales, compared with $45,949,000, or 20.1% of net sales in 2001, representing a 3.1% decline. Excluding merger-related costs, year to-date operating income increased 1.2% to $47,877,000, or 21.2% of net sales, from $47,312,000, or 20.7% of net sales, in 2001.

Investment income for the second quarter of 2002 was $1,188,000, down 41.8% from the $2,042,000 in investment income recorded in the second quarter of 2001. This decrease was the result of unrealized mark-to-market adjustments on the Company’s investment portfolio, and a write-down of a long-term investment.  These non-cash adjustments caused an $846,000 decrease to investment income during the quarter. For the year to-date, investment income totaled $5,355,000 in 2002, versus $4,203,000 in 2001.

Income before income taxes for the second quarter of 2002 increased 13.7% to $25,709,000 from $22,611,000 for the second quarter of 2001. For the year to-date, income before income taxes amounted to $49,046,000, compared with $49,065,000 for the first six months of 2001.

The effective income tax rate for the second quarter of 2002 and 2001 was 36.0%. Net income was $16,460,000, or $0.53 per diluted share, compared with $14,471,000, or $0.47 per diluted share. Excluding merger costs, net income for the second quarter of 2001 was $14,811,000, or $0.48 per diluted share.

For the year to-date, the effective income tax rate was 36.0% for 2002 and 2001. Net income was $31,400,000, or $1.02 per diluted share, compared with $31,401,000, or $1.02 per diluted share.  Excluding merger costs, net income for the first six months of 2002 was $33,559,000, or $1.08 per dilute share, compared with $32,274,000, or $1.05 per diluted share, for the corresponding period in 2001.

Liquidity and Capital Resources

The Company continued to maintain high levels of liquidity, principally from cash generated from operations. As of June 29, 2002, the Company had $289,329,000 in cash and cash equivalents and investments and marketable securities, compared with $249,349,000 at December 31, 2001. During the six months ended June 29, 2002, net cash used in operations totaled $12,748,000, and included an increase of $49,908,000 in investments and marketable securities. During the six months ended June 29, 2002, accounts receivable increased $4,343,000, net of the effect of foreign currency translation adjustment. The increase in receivables was due to higher sales offset by a decline in days sales outstanding to 58 days from 64 days in the second quarter of last year. Also during the first half of 2002, inventories declined by $650,000, net of foreign currency translation adjustment. Compared to the same period a year ago, inventory turns increased from 5.1 to 6.0. Management believes that its reserves for bad debt and inventory obsolescence are adequate. Purchases of property and equipment totaled $4,111,000 for the first six months of 2002. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.

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Significant Customer

Sales to ScanSource, Inc., accounted for 13.1% of net sales for the second quarter of 2002 and 2001. For the six months ended June 29, 2002 and June 30, 2001, sales to ScanSource, Inc., accounted for 12.9% and 11.7%, respectively.  No other customer accounted for 10% or more of net sales during the second quarter of 2002 or 2001.

Expectations

During its quarterly conference call on July 19, 2002, management provided net sales and earnings guidance for the third and fourth quarters of 2002 as follows ($ amounts in 000’s, except per share data):

Gross profit margins are expected to increase as a result of increased sales volume and consequent reductions of capacity variances, as well as the expected favorable effect of foreign exchange compared to last year. Operating expenses should fall in the range of $30,000 to $31,000 per quarter.

Safe Harbor

Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those reflected in such forward looking statements. These factors include market acceptance of the Company’s printer and software products and competitors’ product offerings. They also include the effect of market conditions in North America and other geographic regions on the Company’s financial results. Profits will be affected by the Company’s ability to control manufacturing and operating costs. Because of the Company’s large investment portfolio, interest rate and financial market conditions will also have an impact on results. Foreign exchange rates will have an effect on financial results, because of the large percentage of the Company’s international sales. When used in this document and documents referenced, the words “anticipate,” “believe,” “estimate,” “will” and “expect” and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Readers of this document are referred to prior filings with the Securities and Exchange Commission, including the Risk Factors portion of Management’s Discussion and Analysis of Financial Condition and Results of Operation in Zebra’s Form 10-K for the year ended December 31, 2001, for a further discussion of issues that could affect Zebra’s future results. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

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Item 3.           Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in the Company’s market risk during the second quarter ended June 29, 2002. For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

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PART II - OTHER INFORMATION

Item 4.           Submissions of Matters to a Vote of Security Holders

(a)           The Company held its Annual Meeting of Stockholders on May 15, 2002.

(b)                                 The Company’s stockholders voted on the following proposals:

1.                                       To elect six directors to the Company’s Board of Directors.

2.                                       To approve a proposal to amend the Company’s Certificate of Incorporation to adopt a classified Board of Directors.

3.                                       To approve a proposal to adopt the Zebra Technologies Corporation 2002 Non-Employee Director Stock Option Plan.

4.                                       To ratify the selection by the Board of Directors of KPMG LLP as the independent auditors of the Company’s financial statements for the year ending December 31, 2002.

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Item 6.    Exhibits and Reports on Form 8-K

(a)           Exhibits.

(b)           Reports.

The Registrant filed no reports on Form 8-K during the quarterly period covered by this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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